Friday, July 30, 2010

Chief Economists are for PR

Ezra Klein has a post promoting Blinder and Zandi's model that shows massive good effects from more government deficit spending. As the model is a 1970's vintage approach, an approach that attracted the nations best minds for decades, and was abandoned because they don't work better than rather simple alternatives (eg, a vector autoregression of GDP, Fed Funds, and the Baa-Aaa spread).

I found this amusing because it highlights that journalists grab whatever science supports their ends. The details are not important, you have a professor with lots of publications, he has a complicated scientific argument, it makes you an objective, rational journalist. He even quotes Narayana Kocherlakota saying macro models work, not realizing the Kocherlakota was actually talking about a very different class of models than the one Blinder and Zandi use, and forgetting that of course a macroeconomist would say macro theory works.

At one point, Klein reaches for this argument for believing in their results:

It's also worth noting that the private sector relies extensively on these models, and it would be odd for them to give Moody's all that money if they thought there was no predictive value.

Presumably, he infers that as Zandi works for Moody's, his results are somehow used by Moody's. They are, but not in the way he thinks. I used to work at Moody's. Moody's does not make money off their macro economic opinions, they make money issuing ratings on debt, something they are paid well for. The macro view is alluded to in any analyst opinion, but even within Moody's it's not like the analysts think their economist knows better than others. CNBC and the outlets need someone to comment on macroeconomic topics, so having a full time economist discuss these things makes sense. Yet, remember, economists can't predict business cycles, or explain why Mexico is poor, while the US is rich. Sure, people have theories, but there's no consensus, highlighting that macroeconomists don't understand the big issues on their plate.

I worked directly for Chief Economists at two major banks, First Interstate in the late 1980's, and KeyCorp in the 1990's. While it would be nice to know when the next recession or interest rate move will happen, no one thought the economist knew better than other random members of the executive committee. Economists are good at presenting the information that seems useful, but as per tying it together, they can't and most people making important decisions know that. This is why economists are always on TV and not in boardrooms. It is also why economics departments at banks have gone from large staffs in the 1970s (at the height of the Keynesian modeling boom), to basically one guy, because it was discovered his or her only value is getting the company name on TV. If someone presents himself as especially credible because he was a chief economist, I know he's a fool.

I spent 3 years of my life working directly for private sector macroeconomists, and the main thing I learned is they don't know anything useful. It's like studying the labor theory of value: if you really understand and have tested it empirically, you use such knowledge on the subject only in arguing with naive people who think the theory can buttress their arguments. I try to rationalize my waste of time on this subject by saying 'well, I now know really well what we don't know', but as the list of irrelevant theories is infinite, if I could redo my career I would have just ignored it all from the outset.

There is a classic Youtube clip of Peter Schiff (real-world, no B.S., says it like it is economist) ripping Art Laffer (old school, out of touch, institutionalised, rose-coloured, book economist) a new one. It's pretty a much a metaphor for your post.

You know, after the GFC and the devastation it caused and the underlying insidious manipulation of the monetary system and the stock market, it's safe to say that most economists are great at basic financial theory, but as hapless as the common bum when it comes to how the world really works.